from the there's-a-lot-of-inefficiency dept

A few weeks back, the folks at Planet Money tried to break down the economics of Katy Perry's massively successful album with its five hit singles. Specifically, they wanted to figure out how much money her label made from such a big success. What comes out is a step-by-step description of the massive inefficiencies of the major label recording system. There are things like paying producers $100,000 per song they produce on the album. Then there's all the payola... er "special promotions" to get the songs played on radio so much. In the end, Planet Money calculates that Perry's label, EMI, probably made somewhere around $8 million in profit from Perry's music sales in the US. That's not topline revenue, but bottomline profit. That's not bad per se, but for an album with five hit singles and which was clearly one of the most successful albums in 2011, you begin to see why the labels are struggling.

But, of course, Perry, herself isn't struggling. As the full podcast by Planet Money notes, Perry has been able to avoid getting sucked into a "360" deal where the label gets to take some of all the revenue she earns. They just get the record sales. Perry, in the meantime, is estimated to have made $44 million in 2011 -- a large chunk of that coming from her tour, which alone grossed over $50 million.

What you begin to realize as you see more and more stories like this is, once again, the "problem" has nothing to do with the "music industry" failing... or even that musicians aren't able to make money any more. It's all about the bad economics of the record labels. They set themselves up to fail this way, focusing solely on that one slice of the pie, and not moving very quickly to adapt when the market shifts. Instead, they seem to have kept up the inefficiencies associated with making such a "hit" album, without figuring out a way to profit from the results. Of course, for artists like Perry, things are great. She's able to make a ton of money, most of which doesn't first have to filter through the label...

from the yet-another-IP-market-distortion dept

Having already covered the basics of the Google deal to buy Motorola Mobility, we asked Derek Kerton to weigh in with his thoughts on what the deal really means.

Some suggest that Google bought Motorola Mobility Inc (MMI) so that it can vertically integrate and produce flagship phone models that have the polish and seamlessness of the iPhone. But the real reason is a common theme here at Techdirt: Google needs to build its defenses against patent lawsuits in the smartphone industry.

On the very face of it, Google doesn't need a handset subsidiary to make a custom Google phone. They can easily commission a handset exactly how they want it from OEM brands like HTC and Samsung, and have already done just that with the Nexus models. They could easily design their own brand of phones and have it built by contract manufacturers like Foxconn (as Apple does). I've read elsewhere that Google now gets the benefit of better understanding of the challenges of integrating Android into handsets. That's also incorrect. Google has a history of sending teams of engineers to most of their handset and tablet partners to work side by side overcoming those challenges.

Perhaps Google just saw a good deal on Motorola. Its stock price has been dropping through the decade, and also the past year. The market value prior to today was just $7.3 Billion, compared to $20B for Nokia or $13B for RIM. Perhaps, like Nortel before it, the value of Motorola's Intellectual Property (IP) is being hidden by a poor operational record. A buyer like Gordon Gekko (of the 1987 film Wall Street) could have bought up MMI, divested the operational arm from the IP portfolio, and realized a gain by separating the parts (as Gekko famously did to an airline). Of course, that's a 'private equity' view on the purchase, but Google has indicated it will retain MMI for now. Still the sum of the parts might be worth more than the whole. Although not a startup, this seems similar to Masnick's post yesterday that the value of a startup's patents might exceed the value of the operation.

There is also the less-mentioned factor that Google now also owns MMI's set-top-box division, which might give a shot in the arm to the fledgling Google TV business. Bundling Google TV into every STB would be great for Google, but I would expect that, since these boxes are all bought by cable operators, the cable companies would ultimately decide if Google TV actually remained in the box once it was installed on the customer premises. Since Google TV competes with their on demand services, it may end up as popular as the built-in laptop tethering feature is on Verizon's Android smartphones - i.e. Verizon takes it out.

My understanding is that Google intends to run Motorola as independently as possible. That is, no doubt, to head off what is known as 'channel conflict'. Channel conflict occurs when one member of a supply chain, say the Android OS supplier to many handset vendors, expands into another part of the chain, in this case the handset industry. Now they are both a supplier AND a competitor to companies like HTC, Samsung, LG, etc. Historically, the other vendors start to mistrust their OS supplier, and become more reluctant to use the OS as they search for other options.

We've seen this before with Nokia's handling of Symbian. Since 2001, Symbian was, ostensibly, an openly available smartphone OS that any handset manufacturer could use. Nokia got behind this idea full force, not wanting to cede the market to OS companies like Microsoft. They pushed the idea of other handset vendors joining them, in competition against Redmond. Some did adopt Symbian, including Ericsson, Motorola, Siemens, NTT DoCoMo. But Nokia struggled with the notion that Symbian was "too controlled by Nokia" since around 2003, so they spun it off into an open consortium in 2009. Too little too late. The other OEMs didn't ever really believe that Symbian was truly independent. The end result is that very few other handset vendors ever got fully behind Symbian, even during the time when it was the best smartphone OS in the world. So Nokia just ended up buying it back again in 2010, and finally killing it off recently.

With Android linked too closely to Motorola, companies like Samsung might be driven more to their own OS, called BADA, while others like LG could seek new alternatives (Windows, QNX...) Thus, Google now must re-interpret the same dance that Nokia did years ago: "No, don't worry, Android is still open. You will have as equal access as Motorola." This may succeed, but is a precarious position. The dance partners may have changed, but the music is still the same. Let's see if they come up with some new moves.

OEM confidence that Google will keep equal access to Android to all handset vendors is made even more precarious since the recent moves by Google to prefer some vendors of its formerly "open" Android OS. Google only released the latest tablet version of the OS (Honeycomb 3.0) to select partners, shutting out the open source community and other hardware vendors from the OS for now. The first to get exclusive access? Motorola, for the Xoom tablet. This is not the best way to ease OEM concerns around equal access, given that some may be 'more equal than others'.

It becomes clear that what Google truly needs from the acquisition is the patent portfolio of Motorola Mobility. The smartphone patent wars have been raging lately. It seems every handset vendor is getting sued by big competitors and by patent trolls alike on a daily basis. Android vendors, for example, pay nothing to Google for use of the OS... but they must pay about $5 per phone to Microsoft because MSFT had the smartphone patent leverage against Google. In another dire example of the risk of patent assault on Android device makers, the Samsung Galaxy 10.1 Tablet has been shut out of European and Asian markets by injunctions based on patent claims from Apple.

To fend off patent assaults, companies seek to build their own patent arsenals. That, for example, is why so many vultures hovered around the carcass of Nortel, and bid up its patent portfolio to 4x what the market expected. Google bid, but did not win at the Nortel auction. But with Motorola's 14,000+ patent portfolio in the mobile phone industry, Google can not only defend Android much better from the patent assault (by threatening counter-assault), but Google can thus reduce risk and uncertainty for its handset partners, thereby making Android more attractive.

Think about it. One of the biggest features of the Android OS for device makers was the license fee: free. Free, as Techdirt readers know, offers some very powerful mathematical and business implications. Suddenly, building an in-house OS for your car stereo or TV remote control may look less attractive than a more powerful, free, Android OS. Same goes for tablets, fridges, netbooks, or phones. But if MSFT and Apple (and countless others) can layer up license fees, the attractiveness of Android starts to diminish. The power of 'free' disappears, and instead, uncertainty and risk of lawsuit reign supreme.

So, the deal results in two opposing forces for the future of Google: IP cost and risk mitigation, and potential channel conflict. If Google can succeed at making the IP risk mitigation more important than the channel conflict for the OEM vendors of the world, thereby winning more handset and device partners, the Motorola purchase can be a success. If channel conflict is the more important part of the equation, Google loses big. I wonder if Google might someday sell off the handset maker, but keep the IP. Big news, either way. It'll be interesting to see how it plays out.

from the urls-we-dig-up dept

Who doesn't like a great deal? Every once in a while, a deal that sounds too good to be true, actually pans out. Using bureaucracies to your advantage can be profitable (or just enjoyably satisfying for the vengeful). Here are just a few schemes that folks have (almost) gotten away with.

from the all-about-the-execution dept

About a month ago, the folks at Planet Money did a nice podcast on the economics of Groupon. There's no doubt that there's a bit of a "coupon" bubble going on these days, with tons of companies crowding into the space, and (as the Podcast notes) a bunch of ex-Wall St. types jumping into the space with talk of creating derivatives on coupons/deals. At the same time, plenty of people have mocked Groupon and insisted that its model isn't sustainable and others can easily come in and kill Groupon. In fact, some of the Wall St. guys who stayed on Wall St. are saying that Groupon's value shouldn't be that high because anyone with a phone can copy them.

Lots of people are discussing Felix Salmon's excellent analysis of the economics of Groupon, which is really more about the fact that Groupon has dominated the space because it executes well. That is, it's not about the idea, it's about the execution. The fact that it has remained dominant despite so many copycats shows that just copying isn't enough. This doesn't mean that Groupon will always be the best at executing (in fact, I doubt it will be). But it's not so simple as just coming in and copying.

This is an issue that comes up all the time when we talk about business and intellectual property. People who haven't built up businesses like this assume that all you need is the idea -- and if an idea can be copied, then the company can't succeed. But that ignores just how important the execution element is. Salmon talks about how hard Groupon works to make sure its advertisers are happy with the results, to a level beyond most of its competitors. However, I think there's another element of Groupon's execution that hasn't received nearly enough attention: how enjoyable it makes the whole thing for consumers.

Groupon employs a bunch of writers who work hard to make sure all of the deals are compelling, enjoyable and fun. It always amazes me how much people underestimate the value of the quality of the writing in Groupon's offers. However, where it really struck me was a few months back, when I was researching some newer competitors to Groupon -- in particular, newspapers that were offering deals directly to compete with Groupon. In theory, newspapers should be able to absolutely destroy Groupon. If you're just standing on the mountain looking down, and seeing who has the advantages here, it's clearly the newspapers. Newspapers already rely on local advertising and deals, and have established long-term relationships in the market. On top of that, newspapers employ a ton of (mostly) high quality writers as well, so they should be able to create similarly compelling content.

And yet, when I was looking at various newspaper Groupon clones, what struck me was how boring and dull their offers were. Even if the deals themselves were comparable (and they often weren't), they just weren't that interesting or compelling to read. And that's because the newspapers -- like the Wall St. analyst above -- are engaging in cargo cult copying, where they think that all that matters is copying the superficial idea -- while missing the secret sauce that goes into the less obvious execution.

As a final aside, the quality of Groupon's content highlights another key point that we've raised many times before: how "infinite goods" like content make scarce goods more valuable. In this case, the "content" created by Groupon's writers (and, yes, this is also an example of how advertising is content) is valuable. But no one's selling the "content." What Groupon is doing is using that good content to make the scarcity of the deals more valuable, making more people willing to buy them.

In the end, I will admit that I have my doubts about the overall sustainability of Groupon itself, but it's not because "the idea" is easily copyable. I'm just not convinced that Groupon can continue to execute as well, and some aspects of what it's offering have some elements of a fad written all over them. But claiming that the company is overvalued because the "idea" is too easy makes little sense.

from the not-backing-down-easily dept

While Limewire lost its lawsuit in a big way to the record labels (as pretty much everyone expected), the ensuing legal fight has remained quite interesting. We've already covered the surprising move by the judge to try to explore the "real costs" of file sharing to determine damages, and in response, it looks like Limewire is trying to drag tons of other companies into the fight. Limewire is claiming that just relying on the recording industry's own documents concerning "costs" and royalties isn't enough. This makes sense, given RIAA accounting practices. However, its efforts to get others to jump in may be pretty difficult as well. A court has already rejected a request to subpoena MediaDefender, one of the industry's favored "anti-piracy" outfits, and another court is reviewing Limewire's request to compel Amazon to hand over royalty information. The indications are that it's also seeking (or will seek) similar info from Apple. While I doubt the courts will let Limewire go through with most of these subpoenas, if they do happen to get the info, we could see quite the airing of dirty laundry and details concerning various music licensing deals -- which is the last thing the RIAA wants to see happen.

from the sense-and-nonsense dept

Lots of talk today about the fact that Newsweek, the struggling magazine that's been around for 77 years, has merged with two-year old website The Daily Beast, which never really picked up all that much traffic considering its ambitions. But in an odd move, reports now are saying that the plan is to shut down the Newsweek site and to keep The Daily Beast running. If that's the case... um... why merge at all? Newsweek has the more well known brand and much more traffic. This sounds like an ego merger, where the idea is just to promote the fact that The Daily Beast devoured Newsweek. And that gets you, what, the attention of a tiny group of media business insiders for a couple weeks?

from the rearranging-deck-chairs dept

We've discussed, for quite some time now, the ridiculousness of a performance rights tax on radio. This is the attempt, by the record labels, to get radio stations to pay performers for advertising and promoting their music. This is clearly not needed, because in the real world, without this, record labels already know that radio play is valuable: it's why they keep running payola scams. For them to try to then legally mandate that money should flow in the opposite direction is downright ridiculous. In what world does the government make someone pay to promote someone else?

After years and years fighting this, we should have known that the NAB would come up with some ridiculous idea in the end. The NAB, which represents broadcasters, is almost always on the wrong side of policy debates (that's what happens when your job is to protect a dying industry), but on this one issue we agreed... until now. Rumors are circulating that the NAB is willing to cave on performance rights, if the RIAA, in exchange, supports a totally wasteful plan to require FM radio receivers be placed in mobile phones, MP3 players and other digital devices. Now, everyone involved says no deal is done yet, but there are multiple indications that this is exactly where the conversation is heading.

The NAB tries to defend this by comparing FM radio -- a dying technology -- to federal mandates on digital television tuners. That, of course, was entirely different in so many ways. It involved attempts to move the country forward to a new technology, not mandating an obsolete one. It also was done for a very specific reason: to try to recapture tons of valuable spectrum that could be put to much more valuable and practical use. Mandating FM tuners is just a waste of time and money in a quixotic attempt by broadcasters to prop up FM radio. My mobile phone has an FM receiver today, and I've never even looked at it. Some manufacturers have chosen to put this technology into devices today -- and that's fine, if they choose to do so. But, mandating it as part of a backroom political deal? No thanks.

from the hey-at-least-it-was-cheap dept

It's been rumored for several weeks now that Palm was up for sale, with a number of different companies supposedly taking a look at it, but news has come through now that HP has picked it up for $1.2 billion. Palm's business has been running downhill for a few years now; its worldwide market share has fallen from 3.5 percent in 2005 to 1.5 percent in 2009 -- despite the relatively warm welcome its Pre device received. The Pre was the first Palm phone to run its latest operating system, WebOS, which was supposed to help the company compete in a revitalized and highly competitive marketplace against the likes of Android devices and the iPhone. But that hasn't yet happened. The Pre (and the following device, the Pixi) hasn't grabbed significant market share, which compounds Palm's other problem: lack of a strong developer community for WebOS. That is actually sort of ironic, given that an older incarnation of Palm was probably better than anybody in the mobile space at cultivating a huge and loyal developer community, back in the days of Palm OS. So if scale and a lack of developers are the two biggest problems holding Palm back, does the HP deal actually do anything to help solve them? Maybe that's looking at the situation the wrong way: perhaps the point of this isn't for HP to fix Palm, but for Palm to bring something more to the table for HP. Like 1,500 patents.

from the death-by-stupidity dept

A couple years ago, we discussed how Universal Music CEO Doug Morris gleefully explained how clueless he was about technology -- while also being quite ignorant of basic economics and business models. It's amazing that Vivedi has allowed him to remain in charge. One of the more stunning statements was that the idea that you had to give up some money now to make more in the future just means "someone, somewhere, is taking advantage of you." Apparently, the guy has never heard of investing and has no bank accounts that earn interest, because that's just "someone, somewhere... taking advantage."

No money means no content. That is the way the labels (major and independent) look at potential partnerships with internet companies. Even when it is obvious a service provides added value in promotion and sales, the mantra stays the same: no money, no content. Even when a service invests substantial amounts of money in creating high quality concert footage and an award winning platform to show it to the world, the mantra stays the same: no money, no content.

When you look at it from a label point of view, it might even look logical. Their business models have been hammered the last ten years by decreasing CD sales. Their radio, TV and newspaper partners are not doing their promotional job as they used to. And last but not least: the majority of consumers are now downloading tracks for free. All bad things for companies that invest in recordings of artists.

So the most important feature that new partners have to have is: MONEY. Money to counter the decrease in CD sales. Promotion has turned into a dirty word. MTV for example got big and wealthy by showing video clips paid for by the labels. So now these labels think: We will not let that happen again. From now on everybody who wants to become a media partner online is going to have to pay up front to even start.

It's hard to think of anything more short-sighted or suicidal. Here are all sorts of online companies looking to help promote your works better so that you can make more money, and the you decide that unless they give money up front, they need to be shut down. And we've seen this over and over again. It's why every hot new music startup ends up getting sued by the record labels, with the end result being either the site gets shut down, or the startup gives a big equity chunk to the labels, in combination with promises of impossible-to-afford payments. The record labels with their "no money, no content" mantra have destroyed their own business. So many services that could have helped better promote musicians killed off because of this silly and suicidal mantra. It makes you wonder how the management at those record labels keep their jobs. Don't they have boards and parent companies who monitor what's happening?

from the hello...-reality dept

In the last few years, Zappos has definitely come on strong as an e-commerce brand -- perhaps the first online brand ever to have a real shot at unseating Amazon in terms of serious customer loyalty. Obviously, this did not go unnoticed by Amazon. The key to Zappos' success has been their focus on overdelivering on the customer service front (sometimes to hilarious levels). Zappos execs realized a key point that many more companies really ought to understand: customer service is marketing. Customer service is where many of the interactions occur with your customers. Companies that view customer service as a cost center will discover that they end up driving away customers. Zappos, on the other hand, would bend over backwards to keep customers happy -- and because of that, customers were very loyal to the company.

While still a lot smaller than Amazon, there was definitely a lot of attention getting paid to a potential world where Zappos had a brand presence that rivaled Amazon. It's no surprise, then, that the two companies have probably discussed an acquisition, and it looks like those plans have finally come together, as Amazon is buying Zappos. The link there is to the letter announcing the deal from Zappos' CEO Tony Hsieh. I like Tony and like what he's done with Zappos, but have to admit the letter is a bit silly, as he tries to redefine the acquisition as not being an acquisition:

This morning, our board approved and we signed what's known as a "definitive agreement", in which all of the existing shareholders and investors of Zappos (there are over 100) will be exchanging their Zappos stock for Amazon stock. Once the exchange is done, Amazon will become the only shareholder of Zappos stock.

Over the next few days, you will probably read headlines that say "Amazon acquires Zappos" or "Zappos sells to Amazon". While those headlines are technically correct, they don't really properly convey the spirit of the transaction. (I personally would prefer the headline "Zappos and Amazon sitting in a tree...")

We plan to continue to run Zappos the way we have always run Zappos -- continuing to do what we believe is best for our brand, our culture, and our business. From a practical point of view, it will be as if we are switching out our current shareholders and board of directors for a new one, even though the technical legal structure may be different.

If I had a dollar for every time an acquired company insisted that the acquirer was going to keep them running exactly the same as before, I'd be a lot wealthier. And if I had to give back that dollar for every time that wasn't true, I'd be giving all that money back. This is an acquisition, no matter how Zappos is trying to paint it. It's great (and, I believe, smart) that Amazon plans to keep Zappos running as a subsidiary, rather than fully integrate the two, but that doesn't make this any less of an acquisition -- and Zappos' attempt to paint it as something "different" is a bit disingenuous. Yes, the company always likes to present what it does as being different and unique, but an acquisition is an acquisition.